On April 23, 2024, the Federal Trade Commission (FTC) released
its final rule(the Final Rule) which generally
bans all non-competition clauses with workers (including employees
and independent contractors) as unfair methods of competition, with
exceptions for bona fide sale of business non-competes and for
non-competes entered into with “senior executives” prior
to the effective date of the Final Rule, which will be 120 days
after the date of publication in the Federal Register. The Final
Rule’s prohibitions on non-competes do not apply where a cause
of action related to a non-compete clause accrued prior to the
effective date of the Final Rule. The Final Rule was issued after a
review and comment period of the proposed rule, issued January 5, 2023 (the
Proposed Rule), and was approved by a vote of 3-2 by the FTC. This
Advisory summarizes the key takeaways from the Final Rule. Several
challenges to the rule are pending and others may be forthcoming,
including by the U.S. Chamber of Commerce, and it is uncertain
whether, and if so to what degree, those challenges will be
successful.
General Rule as Released
The Final Rule would generally prohibit employers from (1)
entering into or attempting to enter into a non-compete clause, (2)
enforcing or attempting to enforce a non-compete clause, or (3)
representing that a worker is subject to a non-compete
clause.1 Because the Final Rule does not prohibit
enforcement of non-competes where a cause of action related to the
non-compete accrued prior to the effective date of the Final Rule,
pending litigation is not affected.2
The term “non-compete clause” refers to a term or
condition of employment that prohibits a worker from, penalizes a
worker for, or functions to prevent a worker from (1) seeking or
accepting work in the United States with a different person where
such work would begin after the conclusion of the employment or (2)
operating a business in the United States after the conclusion of
the employment.3 A non-compete clause includes
provisions contained in both contractual terms and employee
handbooks, whether written or oral. The FTC states in the preamble
that this Final Rule does not categorically prohibit other types of
restrictive covenants, such as non-disclosure agreements or
non-solicitation agreements, which do not by their terms prohibit a
worker or penalize a worker for seeking or accepting other work or
starting a business after they leave that job. Non-solicitation
agreements can satisfy the definition of a non-compete clause where
they function to prevent a worker from seeking or accepting other
work or starting a business after their employment ends, which is a
fact-specific inquiry. Although the FTC does not define which types
of non-solicit agreements prevent a worker from seeking other work
or starting a business after their employment ends, non-solicit
agreements prohibiting solicitation of employees appear to be
unaffected.4
Existing Agreements for Senior Executives
The Final Rule includes a “grandfather” rule for
“senior executives” which provides that it is not unfair
competition to enforce or attempt to enforce a non-compete clause
entered into before the effective date of the Final Rule, or to
represent that the senior executive is subject to a non-compete
clause entered into before the effective date of the Final
Rule.5 For this purpose, a senior executive is a worker
who was in a policy-making position and earned total compensation
of at least $151,164 in the preceding year or year before
termination (with specific rules for annualizing partial
years).6 A policy-making position means an entity’s
president, CEO or equivalent, or other officer of a business or
natural person who has final authority to make policy decisions
that control significant aspects of a business entity or common
enterprise (which does not include authority limited to advising or
exerting influence over policy decisions or having authority to
make policy decisions for only a subsidiary or affiliate of a
common enterprise). If an officer of a subsidiary or affiliate has
policy-authority for the common enterprise, and not just a
subsidiary or affiliate of an entity that is part of the common
enterprise, then this person has policy-making authority for the
purposes of these rules.
Sales-Based Noncompete Exception
The Final Rule contains an exception for bona fide sale of
business non-competes.7 Under the Final Rule, a
non-compete clause may be entered into by a person pursuant to a
bona fide sale of a business entity, or the person’s ownership
in a business entity, or all or substantially all of a business
entity’s operating assets. The Final Rule eliminates the 25%
ownership requirement which had been included in the Proposed
Rule.
Notice Requirement for Existing Agreements
The Proposed Rule would have required employers to rescind all
non-compliant existing non-compete clauses. The Final Rule does not
include this requirement. Instead, workers with existing
non-compete clauses that would be prohibited under the Final Rule
must be provided with clear and conspicuous notice by the effective
date that the worker’s non-compete clause will not be, and
cannot legally be, enforced against the worker.8 Model
language for a safe harbor employee notice is provided in the Final
Rules, as well as requirements regarding how the notices must be
distributed to workers.
Clarification for Franchisee-Franchisor Relationships
The Final Rule clarifies that a “worker” with whom the
rule restricts or bans non-compete agreements does not include a
franchisee in the context of a franchisee-franchisor
relationship.9 However, the Final Rule applies to
non-competes with a person who works for a franchisee or
franchisor.
Effective Date and Employers Covered
The Final Rule becomes effective 120 days after the date the
Final Rule is published.10
Because the Final Rule defines non-competes as an unfair method
of competition under the FTC Act, it applies only to companies over
which the FTC has jurisdiction. The FTC lacks jurisdiction over
banks, savings and loan associations, credit unions, air carriers,
common carriers, and firms covered by the Packers & Stockyards
Act, as well as nonprofits except nonprofits whose members are
for-profit companies (like trade associations), and employees of
such entities are therefore not covered by the Final Rule.
There have already been several challenges to the rule,
including by the Chamber of Commerce, on ground that the FTC lacks
statutory authority under the FTC Act to issue rules defining
unfair methods of competition at all (because the
statutory grant of such rulemaking authority is at best ambiguous),
as well as that the FTC has no authority to impose a nationwide ban
on non-competes absent clear congressional authority under the
“major questions doctrine,” even if it otherwise has some
authority to engage in rulemaking on unfair methods of
competition.
Footnotes
1 16 CFR § 910.2(a).
2 § 910.3(b).
3 § 910.1.
4 The Final Rule states that: “non-solicitation
agreements can satisfy the definition of non-compete clause in
§ 910.1 where they function to prevent a worker from seeking
or accepting other work or starting a business after their
employment ends. Whether a non-solicitation agreement — or a
no-hire agreement or a no-business agreement, both of which were
referenced by commenters, as discussed previously — meets
this threshold is a fact-specific inquiry. The Commission further
notes that — like all the restrictive employment agreements
described in this Part III.D — non-solicitation agreements,
no-hire, and no-business agreements are subject to section 5’s
prohibition of unfair methods of competition, irrespective of
whether they are covered by the final rule.” Notably, the
non-solicitation agreements referenced by the commenters that the
FTC was responding to were non-solicitation of customer
agreements. We are not aware of many circumstances — nor did
the FTC give any examples — of when a non-solicit of
employees can function in this fashion so as to be
unenforceable.
5 § 910.2(a)(2).
6 § 910.1.
7 § 910.3(a).
8 § 910.2(b).
9 § 910.1.
10 § 910.6.
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